Barkpass is a limited liability company registered with the Iowa Secretary of State's office. It is classified as a partnership.
If you've never started a company before, then the above paragraph might sound like jibberish. It certainly did to us before we started this process!
Let's talk about the journey of Barkpass from idea to LLC.
Note: This post talks about legal things. We are NOT lawyers — the furthest from it, in fact. So take the following advice with a grain of salt. And remember: a grain of salt is very, very small.
Before we start, it's good to consider why we might even create an LLC at all.
We've all done projects for pay here and there — mowing your grandma's yard for $20, helping a friend with a website project. So what's the difference?
Here are a few big reasons:
Let's dive into each of these items and work backwards to find out where exactly an LLC comes in.
When you go to the bank to open a bank account of any kind, they'll ask you for a super official identification number.
If you are a person who is also a United States citizen, this will be your Social Security Number (SSN).
But if you're a business or organization, you don't have a social security number. 😱
This is where an Employee Identification Number (EIN) comes in.
An EIN is obtained by going to the IRS website and filling out a form. In the form, you are required to decide how you'll be filing taxes (see reason #3). Then, it gives you a nice EIN number to use. Pretty nifty.
Once you have an EIN, you go into the bank and set up a business account. During this trip, they will likely ask to see not only your EIN but also your articles of incorporation, or certification from the Secretary of State's office that you are a legit business.
That certificate is obtained by — you guessed it — filing for an LLC.
As it turns out, building software for local city governments involves contracts! We'll talk in-depth about this process in a future post, but we're glad we had a legit LLC by the time the contract was approved.
A few reasons for this, again in order of importance:
I added an asterisk to this last one, the protection part, because there is some nuance here.
The original point of an LLC is to provide the business owners a limited amount of protection, or a "shield," against bad things that might happen. Heck, it's even in the name: Limited Liability Company.
But as this article by a real lawyer points out, many of those protections have various gotchas and things to look out for in each state.
Essentially, that "shield" is a lot weaker than the renaissance store salesman made it out to be — and I probably shouldn't use it in real combat, much to my chagrin.
That's why I gave it the least amount of importance above. While we're not planning on doing anything illegal with Barkpass, we're also not kidding ourselves that we'll be 100% protected if something goes wrong. Such is the risk of running a business.
Boy, if we could go back in time with the somewhat-limited knowledge we have now and tackle this bullet point again, we'd do it in a heartbeat.
This was the biggest head-scratcher for us while we were trying to form an LLC:
What's the best way to legally structure a company when there are two owners, and the owners are married?
I asked so many friends, colleagues and people in the entrepreneur community. I got a different answer each time.
Here are different schools of thought we heard. Warning: Some of these are inaccurate!
That phrase — disregarded entity — kept coming up in our conversations and research.
You can learn more about LLC filing from the IRS, but my understanding of a disregarded entity is that it's a way to say:
"Hey IRS, I have this LLC but it's just to look more legit. I can just do all the taxes in one place, since it's just me. We're chill. See you at the holiday party."
Normally, disregarded entities are limited to single-person LLCs. However, we were advised (by another non-lawyer) that LLC partnerships who also happened to be married couples and who also filed a joint tax return would count as a disregarded entity.
[sidebar]Why would you want to be a disregarded entity? <br><br>Great question. For us, it was mainly convenience and cost. Knowing the growth of Barkpass was going to be slow and steady and not fast-paced, we hadn't planned on having a huge amount of revenue for the first few years. <br><br>It seems more convenient to simply report what little income we did have along with our joint tax return. Having a separate, state entity meant we'd have to file tax returns on behalf of our business. This means extra work, and — in most cases — paying an accounting firm a few hundred bucks to do this for you the right way. <br><br>For a business the size of Barkpass, disregarded entity seemed like the way to go.
"OK," we thought, "That sounds pretty good. Let's do a married, jointly-filed disregarded entity."
Not so fast.
It is almost painful to type exactly how wrong we were about everything we knew.
First of all, the IRS has a whole page on their site about this. Guess who has two (four) thumbs and didn't read this page?
According to the page above, if we wanted to treat our jointly-owned venture as a disregarded entity, we should not have formed a state entity (an LLC), opting rather to operate as a sole-proprieter and handle everything with one of our SSNs. Ugh.
To make matters more complicated, it is possible to have a jointly-owned disregarded entity operating as an LLC — but only in community property states. We live in Iowa, and Iowa is a common-law marriage state.
Unfortunately, by the time we learned this, we had already filed for a partnership-based LLC. Speaking of which: let's talk about how that happened!
The same chorus of voices from earlier had opinions on how to file our LLC:
I usually like to do stuff online. I'm tech-saavy. I'm a millenial. And LegalZoom wasn't expensive — a couple hundred dollars, if I remember correctly.
However, it wasn't as cheap as filing directly with the Secretary of State's office for $50. And if we were going to spend extra money on this, I wanted to spend it getting help from a local lawyer.
A contact referred us to Hope Wood, and I met up with her one afternoon in her office in downtown Des Moines.
Hope generously answered questions I had about starting a business and how one might go about becoming a LLC.
She offered to help us establish our LLC which would have been a couple hours of work for her. We considered this offer, but we ultimately decided to file it ourselves.
Lesson Learned #1: We should have just paid Hope. More on this later.
In order to make the LLC happen, we needed to file a Certificate of Organization with the Secretary of State. This document essentially outlines the rights, duties, powers and liabilities of each member of the LLC. Now, how do you create this document?
You can hire an attorney to assist or you can do it on your own. Being a start-up, we decided to tackle it on our own to save some dollars. Doing some research online, we were able to find a lot of templates and examples of Certificates of Organization. Plus, the Secretary of State's website has a database you can search to view other business entities to see what they filed. What we found was that no two certificates were exactly alike. Being there was so much variability, we put together what we felt best represented our business in order to file.
The first thing we had to do was choose a registered agent. This is a person with a real mailing address who will handle all of your business for the state. Sometimes, this is a lawyer — but since we were operating lawyer-less, we chose Josh.
Once we had our document ready, we used the Fast Track Filing System to send it in, along with the corresponding $50 fee. This was the easy part! In less than 24 hours, we had a confirmation email back that our business entity was approved.
You can find our listing by searching for "Barkpass" on the Secretary of State database:
Shortly after forming our LLC, we realized that doing our taxes would be much simpler if we switched to a single person, sole-proprietership, rather than a partnership. We looked up how to file an amendment, put together our document and sent it in along with the extra filing fee:
This process was... not so fast. We filed this on April 28, but it took until May 9 to hear back from the Secretary of State's office.
And it wasn't the response we were anticipating. We got a rejection letter:
This felt a little cryptic to us. From what we could gather, they were trying to tell us that something was wrong with our caption, and that we didn't include the original filing date in our document.
This was... perplexing. We definitely did include the original filing date at the top of the original document.
So, we called the Secretary of State's office to get some help! Certainly they would be ready to help a small business get up and running with what seemed like a minor issue.
Unfortunately, when we got someone on the phone, they were quick to say "just be explicit" before ushering us off the line. This was disappointing — but it goes to show why lawyers typically handle this stuff.
Lesson Learned #2: Think like a lawyer when filing amendments.
Second time's a charm, right?
This time, we were absolutely sure to include the original date of filing. We even called it out as a specific article in the document!
We filed it, again.
We were rejected, again:
Turns out, we weren't sure what this amendment was missing. To be honest, we still don't.
And at this point, we decided to let it rest and remain a limited liabilty partnership.
Lesson Learned #3: We should have hired an attorney. (See Lesson Learned #1).
And that's it, folks. This has been our journey to becoming Barkpass, LLC.
Even though we didn't get our amendment filed, we are still set up as a legal entity in the state of Iowa. For two business novices, this is an accomplishment we're proud of! If everything went perfect setting this up on our own, we would be two incredibly lucky pups.
Do you have any other advice? Let us know!